BB&T Corporation (now Truist Financial Corporation) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The registrant named in this 2016 filing is BB&T Corporation; the filing predates the company’s later name as Truist Financial Corporation. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
BB&T is a financial holding company operating primarily through Branch Banking and Trust Company. Results include significant acquisition activity: National Penn was acquired effective April 1, 2016, adding 126 banking offices, approximately $10.1 billion of assets and $6.6 billion of deposits. BB&T also acquired insurance broker Swett & Crawford for $465 million in cash on April 1. Susquehanna and other prior acquisitions also affect comparisons with 2015.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 / prior date |
|---|---|---|
| Net income available to common shareholders | $541 million | $454 million |
| Diluted EPS | $0.66 | $0.62 |
| Net interest income (GAAP) | $1.617 billion | $1.312 billion |
| Net interest margin (FTE) | 3.41% | 3.27% |
| Provision for credit losses | $111 million | $97 million |
| Noninterest income | $1.130 billion | $1.019 billion |
| Noninterest expense | $1.797 billion | $1.653 billion |
| Return on average assets / common equity | 1.06% / 8.21% | 1.06% / 8.20% |
- Six-month results: Net income was $1.157 billion versus $1.048 billion; income available to common shareholders was $1.068 billion versus $942 million. Diluted EPS was $1.32 versus $1.29. FTE net interest income was $3.2 billion, up $530 million; FTE NIM was 3.42% versus 3.30%.
- Revenue and expenses: Management reported Q2 total revenue of $2.8 billion on an FTE basis, up $420 million, largely reflecting acquisitions. Q2 noninterest expense rose $144 million year over year, including higher acquisition and restructuring costs; the prior-year quarter included a $172 million loss on early extinguishment of debt.
- Cash flow: For the first six months, operating cash flow was $861 million, investing cash flow was negative $2.054 billion and financing cash flow was $95 million. Cash and cash equivalents ended the period at $2.613 billion, down $1.098 billion from year-end 2015.
- Balance sheet and funding: Total assets were $221.9 billion, loans and leases $142.2 billion, deposits $159.2 billion and long-term debt $24.4 billion at June 30. Compared with December 31, 2015, loans increased $6.3 billion and deposits $10.1 billion; short-term borrowings fell to $1.5 billion from $3.6 billion.
- Credit and asset quality: The allowance for loan and lease losses was $1.507 billion (1.06% of loans held for investment); total credit-loss allowance, including unfunded commitments, was $1.603 billion. Nonperforming assets were $886 million versus $712 million at year-end; nonperforming loans were 0.56% of loans versus 0.42%. Q2 net charge-offs were $97 million, or 0.28% annualized; first-half net charge-offs were $251 million versus $199 million.
- Capital and liquidity: June 30 regulatory ratios were 10.0% common equity Tier 1, 11.7% Tier 1, 13.9% total capital and 9.6% leverage. The liquid asset buffer was 13.7% of assets; the reported LCR was approximately 135%, above the then-applicable 90% minimum. Shareholders’ equity was $29.7 billion.
Material changes versus comparable periods
- Q2 common earnings increased $87 million and diluted EPS rose $0.04 year over year. Growth was substantially acquisition-related; average earning assets increased $29.4 billion, or 17.8%, from Q2 2015.
- Higher NIM reflected acquisition-related purchase accounting and funding mix, as well as higher loan yields; management reported Q2 loan yield of 4.31% and average interest-bearing deposit cost of 0.23%.
- First-half credit provision increased to $295 million from $196 million. Management attributed pressure principally to energy lending, including approximately $58 million of additional provision in Q1 and $30 million of Q1 energy-related net charge-offs. It also cited higher losses and lower collateral values in nonprime auto lending.
- Mortgage banking income declined to $202 million for the first half from $240 million, reflecting lower production and sales volumes and MSR valuation changes. Q2 MSR valuation effects included faster prepayment assumptions; hedging gains partly offset the impact.
- The effective tax rate was 30.0% for Q2 2016 versus 13.8% in Q2 2015. The earlier quarter included a $107 million tax benefit tied to litigation over tax deductions; Q2 2016 included a $13 million benefit for specified tax-advantaged assets.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. BB&T said it was evaluating the proposed U.S. net stable funding ratio rule and did not expect a material impact from it. It estimated a future FDIC assessment surcharge could increase annual assessments by $40–$50 million.
- After quarter-end, the Federal Reserve accepted BB&T’s capital plan without objection. On July 26, 2016, the Board approved an increase in the quarterly dividend from $0.02 to $0.30 per share and authorized up to $640 million of share repurchases beginning in Q3. The filing separately reports $0.28 per share of dividends declared during Q2.
- Key stated risks include economic and market deterioration, interest-rate and margin sensitivity, credit quality, competition, regulatory or tax changes, cybersecurity and operational disruptions, and the cost and execution of acquisitions and systems integration. Management cautioned that actual results may differ materially from forward-looking statements.
- Energy exposure was approximately $1.5 billion, with allocated reserves of 9.3%; management said the portfolio did not include offshore, second-lien or mezzanine loans. Energy-related shared national credit downgrades contributed to higher nonperforming loans.
- BB&T was cooperating with a HUD-OIG/Department of Justice inquiry into FHA lending practices; no claims had been formally asserted. The company estimated potential net exposure of $25–$105 million and had recorded an $85 million charge in 2014. Management said established reserves for legal proceedings were adequate, while acknowledging an unfavorable resolution could be material.
- BB&T was negotiating termination of Colonial-related FDIC loss-sharing agreements; management did not expect a settlement to materially affect financial condition. The filing estimated a payment to the FDIC of approximately $170 million in 2019 under an aggregate loss calculation.
- The purchase price allocations for National Penn and Swett & Crawford were preliminary. Merger-related and restructuring charges were $115 million for the first half, including $29 million of Q2 restructuring charges related to severance and real estate.
Important facts for investors to verify
- Separate acquisition-driven growth from organic trends, and monitor National Penn integration, conversion timing, related costs and deposit retention.
- Track energy and nonprime auto credit performance, nonperforming loan migration, charge-offs and allowance adequacy.
- Reconcile the reported Q2 dividend of $0.28 per share with the post-quarter board announcement describing an increase from $0.02 to $0.30 per share.
- Review capital ratios after acquisitions and planned distributions, including the fully phased-in CET1 estimate of 9.8% and the authorized buybacks.
- Follow FHA-related investigations, FDIC loss-sharing negotiations and the projected 2019 FDIC payment, as well as any change in reserves or stated exposure.
- Assess whether Q2 earnings comparisons are affected by prior-period tax benefits, the prior-year debt-extinguishment loss, securities gains, MSR marks and merger charges.